Permanent Income Hypothesis

According to the Permanent Income Hypothesis, created by Milton Friedman, the consumers answer in first place to the variations in their permanent income (long term income, being the income purged from the temporary or transitory influences) and only after the current income. So, if a certain variation in the income seems to be permanent (like for example, a promotion at work with a salary increase), the consumer will respond with an increase in the parcel of the consumed income. If that variation in the income seems to be temporary, (like for example a productivity prize given in a certain month) the consumer will tend to respond with the savings of a relevant parcel of this variation.

 

 

Translated from Portuguese by Susana Saraiva, Portuguese-English and English-Portuguese translation specialist. Contact: spams@sapo.pt.